Bleeding stamp duty land tax

Only a few years ago the rules for calculating stamp duty land tax (SDLT) for residential property were relatively simple and straightforward. We had the slab rates whereby the total price paid for the property was charged to SDLT at the rate applicable to that price with a top rate, until December 2014, of 7%. Many disliked the slab system, with good reason, as SDLT bills could jump enormously when the sum paid for a property crept into the next rate, but at least you knew where you were with it. Move forward a few years and the rules have changed almost beyond recognition. So why did it all become so complicated? Two reasons: tax avoidance and party politics.

Changes to date

Successive Conservative governments have sought to stamp out tax avoidance, which, in these times of austerity, has become “morally” wrong. The government understandably didn’t like people – typically wealthy people – putting residential property into companies (UK and non-UK) and then selling the shares in the company as a means of disposing of the property. This type of planning enabled properties to change hands free of SDLT and possibly also stamp duty, which was often reflected in the price paid.

So cue the first change designed to tackle this planning: the introduction of the 15% rate in 2012 for purchases of residential property for more than £2m by companies, some partnerships and collective investment schemes. This rate applies to the entirety of the price and is, therefore, a real deterrent to this planning, but there are several reasonable exemptions to it.

When introduced, this change only applied to homes bought for more than £2m, but now, it applies to homes where the price exceeds £500,000.

The next change came in December 2014, roughly five months before the 2015 general election. The then chancellor George Osborne announced: “It’s time we changed this badly designed tax on aspiration,” and promptly kicked the slab system into touch, introducing in its place the slice system, which appealed to many voters.

Under this system, SDLT is calculated by reference to the rate that each part of the price paid falls into and the slice rates go from 0% to 12%. According to the Treasury, for those paying less than £937,000 this gives rise to an SDLT saving. However, with house prices in London and the South East booming, the “top end” of the market will apply to many home owners and there is some evidence that these changes are starting to slow down house sales.

Just when we thought things might settle down more changes were made. In the Autumn Statement 2015, the government announced it was introducing higher SDLT rates for those looking to acquire second residential properties. This is just one of measures brought in over recent years as part of the government’s ongoing populist attack on the “wealthy” acquiring second homes or buy-to-lets. These changes added an additional 3% onto the existing rates so that SDLT is now payable at 3% on the starting slice and at 15% on the top slice of these additional property purchases. These changes have broad application and unlike the 15% rate regime referred to above, there are no exemptions.

In addition to these changes, there has been the introduction of multiple dwellings relief (MDR), which can apply on the purchase of two or more dwellings. MDR essentially results in SDLT being paid on the mean value of the dwellings acquired (excluding those caught by the 15% regime) subject to a minimum 1%. We also have the rules which provide that six or more dwellings acquired as part of a single transaction can be treated as commercial property for SDLT purposes and therefore subject to the rates applicable to commercial properties.

Hopefully all that’s clear? If you’re not in the 15% rate, you may be in the additional 3% rate, MDR may be available or you might be able to rely on the commercial rates for your residential property purchases.

Overlaid on top of this are the ongoing debates between practitioners and taxpayers with HMRC as to when property is “residential” for SDLT purposes as this can now make a real difference to the SDLT payable.

Crystal ball

What is the future for SDLT and residential property? The amount of SDLT collected on sales of London homes rose in 2015-2016, although the number of transactions was down. Outside London, the SDLT collected on residential properties in the same period had fallen but overall SDLT revenues were slightly up.

SDLT is an easy tax to collect and many will have little sympathy for the so-called wealthy who have been stung by the changes. As residential prices continue to escalate, particularly in London and the South East, many more people will be affected by these changes, which could continue to reduce the number of transactions and ultimately have a knock on effect on SDLT revenues.

The new rules are arguably over-complicated and in some cases iniquitous, particularly as regards the additional 3% rate. Despite this, the rules are unlikely to alter unless it is considered politically expedient to do so or, if SDLT revenues start to slide. For the foreseeable future, we will have to get used to the changes and it is to be hoped that there are no more on the way anytime soon, other than possibly a reduction in the relevant rates. For those having to pay SDLT, life will certainly have become more complicated and, for many, a lot more expensive.